20030625-3071 issued by ferc osec 06/25/2003 in docket ... · williams energy services corporation...

103 FERC ¶ 61,345

UNITED STATES OF AMERICAFEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Pat Wood, III, Chairman; William L. Massey, and Nora Mead Brownell.

American Electric Power Service Corporation Docket No. EL03-137-000Aquila, Inc. Docket No. EL03-138-000Arizona Public Service Company Docket No. EL03-139-000Automated Power Exchange, Inc. Docket No. EL03-140-000Bonneville Power Administration Docket No. EL03-141-000California Department of Water Resources Docket No. EL03-142-000California Power Exchange Docket No. EL03-143-000Cargill-Alliant, LLC Docket No. EL03-144-000City of Anaheim, California Docket No. EL03-145-000City of Azusa, California Docket No. EL03-146-000City of Glendale, California Docket No. EL03-147-000City of Pasadena, California Docket No. EL03-148-000City of Redding, California Docket No. EL03-149-000City of Riverside, California Docket No. EL03-150-000Coral Power, LLC Docket No. EL03-151-000Duke Energy Trading and Marketing Company Docket No. EL03-152-000Dynegy Power Marketing Inc., Docket No. EL03-153-000 Dynegy Power Corp., El Segundo Power LLC, Long Beach Generation LLC, Cabrillo Power I LLC, and Cabrillo Power II LLCEnron Power Marketing, Inc. Docket No. EL03-154-000 and Enron Energy Services Inc.F P & L Energy Docket No. EL03-155-000Idaho Power Company Docket No. EL03-156-000Los Angeles Department of Water and Power Docket No. EL03-157-000Mirant Americas Energy Marketing, LP, Docket No. EL03-158-000 Mirant California, LLC, Mirant Delta, LLC, and Mirant Potrero, LLCModesto Irrigation District Docket No. EL03-159-000Morgan Stanley Capital Group Docket No. EL03-160-000Northern California Power Agency Docket No. EL03-161-000Pacific Gas and Electric Company Docket No. EL03-162-000

20030625-3071 Issued by FERC OSEC 06/25/2003 in Docket#: EL03-137-000

Docket No. EL03-137-000, et al. - 2 -

PacifiCorp Docket No. EL03-163-000PGE Energy Services Docket No. EL03-164000Portland General Electric Company Docket No. EL03-165-000Powerex Corporation Docket No. EL03-166-000 (f/k/a British Columbia Power Exchange Corp.)Public Service Company of Colorado Docket No. EL03-167-000Public Service Company of New Mexico Docket No. EL03-168-000

Puget Sound Energy, Inc. Docket No. EL03-169-000Reliant Resources, Inc., Docket No. EL03-170-000 Reliant Energy Power Generation, and Reliant Energy Services, Inc.Salt River Project Agricultural Docket No. EL03-171-000 Improvement and Power DistrictSan Diego Gas & Electric Company Docket No. EL03-172-000Sempra Energy Trading Corporation Docket No. EL03-173-000Sierra Pacific Power Company Docket No. EL03-174-000Southern California Edison Company Docket No. EL03-175-000TransAlta Energy Marketing (U.S.) Inc. Docket No. EL03-176-000 and TransAlta Energy Marketing (California), Inc.Tucson Electric Power Company Docket No. EL03-177-000Western Area Power Administration Docket No. EL03-178-000Williams Energy Services Corporation Docket No. EL03-179-000

ORDER TO SHOW CAUSE CONCERNING GAMINGAND/OR ANOMALOUS MARKET BEHAVIOR

(Issued June 25, 2003)

I. Introduction

1. As discussed below, the entities listed in the caption (Identified Entities) appear tohave participated in activities (Gaming Practices), that constitute gaming and/oranomalous market behavior in violation of the California Independent System OperatorCorporation's (ISO) and California Power Exchange's (PX) tariffs during the periodJanuary 1, 2000 to June 20, 2001, that warrant a monetary remedy of disgorgement ofunjust profits and that may warrant other additional, appropriate non-monetary remedies. These determinations are based on certain of the tariffs' provisions, an ISO study, a


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1June 20, 2001 has been selected as the end date of the relevant period in thisproceeding when a prospective mitigation and market monitoring plan took effect. Seeinfra note 56; see San Diego Gas & Electric Co., et al., 95 FERC ¶ 61,115 (April 26,2001 Order), order on reh'g, 95 FERC ¶ 61,418 (2001) (June 19, 2001 Order) (In theApril 26, 2001 Order, the Commission issued a prospective mitigation and marketmonitoring plan for wholesale sales through the organized real-time markets operated bythe ISO; the Commission acted on requests for rehearing and clarification of the April26, 2001 Order on June 19, 2001, modifying and expanding the mitigation plan, effectiveJune 20, 2001.)

2As discussed below, we will also direct the ISO to provide the Identified Entitieswith certain transaction data that it relied upon in its study which is discussed below, andcontemporaneously file that data with the Commission.

3This potential disgorgement would apply to the period January 1, 2000 to June20, 2001 and would be in addition to any refunds owed for the period after October 2,2000 in the California Refund Proceeding. By order issued on August 23, 2000, theCommission, among other things, established a refund effective date of October 29,2000, 60 days after the date of publication in the Federal Register of the Commission'sintent to institute an investigation. San Diego Gas & Electric Co. v. Sellers of Energyand Ancillary Services Into Markets Operated by the California Independent SystemOperator and the California Power Exchange, et al., 92 FERC ¶ 61,172 (2000) (August23, 2000 Order). By order issued on November 1, 2000 in the same proceeding, theCommission granted rehearing in part of the August 23, 2000 Order by changing therefund effective date from 60 days after publication of notice in the Federal Register

(continued...)

report by Commission Staff, and evidence and comments submitted by marketparticipants.

2. As the Identified Entities appear to have participated in activities that constitutegaming and/or anomalous market behavior in violation of the ISO and PX tariffs, thisorder directs the Identified Entities, in a trial-type evidentiary hearing to be held beforean administrative law judge (ALJ), to show cause why their behavior, as set forth infra,during the period January 1, 2000 to June 20, 20011 does not constitute gaming and/oranomalous market behavior as defined in the ISO and PX tariffs.2 In addition, we alsodirect the ALJ to hear evidence and render findings and conclusions quantifying the fullextent to which the Identified Entities may have been unjustly enriched as a result of theirconduct. The ALJ may recommend the monetary remedy of disgorgement of unjustprofits and any other additional, appropriate non-monetary remedies.3 For example, the


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3(...continued)(October 29, 2000) to 60 days after the date of SDG&E's complaint (October 2, 2000). San Diego Gas & Electric Co., et al., 93 FERC ¶ 61,121 at 61,370 (2000) (November 1,2000 Order), order on reh'g, 97 FERC ¶ 61,275 (2001) (December 19, 2001 Order)(denying rehearing of the November 1, 2000 Order with respect to the October 2, 2000refund effective date). In a December 15, 2000 order, the Commission found that thespot markets operated by the ISO and PX were dysfunctional. San Diego Gas & ElectricCo., et al., 93 FERC ¶ 61,294 (2000) (December 15, 2000 Order).

4Fact-Finding Investigation of Potential Manipulation of Electric and Natural GasPrices, 98 FERC ¶ 61,165 (2002) (February 13, 2002 Order). The February 13, 2002Order, of course, was not the beginning point of our investigation into the justness and

(continued...)

ALJ may identify non-monetary remedies such as revocation of an Identified Entity'smarket-based rate authority and revisions to an Identified Entity's code of conduct if theALJ finds such remedies appropriate.

3. Further, this order finds that certain activities allegedly engaged in by theIdentified Entities constituted Gaming Practices, but the circumstances in which theyengaged in such activities do not warrant disgorgement of unjust profits. This order alsofinds that certain activities identified below (California Practices) allegedly engaged inby the Identified Entities do not constitute tariff violations; instead, many were legitimatetransactions, which, while they have the superficial appearance of gaming, were notmanipulative. This order also recognizes that some of the characteristics that were usedto identify potential Gaming Practices may also be present in certain transactions thatwere not actually Gaming Practices. As a result, the Identified Entities will have anopportunity to submit evidence to the ALJ that the transactions were not GamingPractices.

4. This order benefits customers by establishing procedures to address activitiesinconsistent with the ISO and PX tariffs during the period January 1, 2000 to June 20,2001, consistent with due process.

II. Background

5. By order issued on February 13, 2002, in Docket No. PA02-2-000, theCommission directed a Staff investigation into whether any entity manipulated prices inelectricity or natural gas markets in the West or otherwise exercised undue influence overwholesale electricity prices in the West since January 1, 2000.4


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4(...continued)reasonableness of the rates of public utility sellers into the ISO and PX markets. For ageneral recitation of this procedural history, including the series of events andcircumstances giving rise to the California energy crisis, see December 19, 2001 Order,97 FERC ¶ 61,275 (2001).

5Initial Report on Company-Specific Separate Proceeding and GenericReevaluations; Published Natural Gas Price Data; and Enron Trading Strategies: Fact-Finding Investigation of Potential Manipulation of Electric and Natural Gas Prices, Docket No. PA02-2-000, issued in August 2002.

6. Pursuant to the directive of the February 13, 2002 Order, Staff undertook acomprehensive fact-finding investigation, encompassing both data gathering and dataanalysis of physical and financial transactions in and out of the California bulk powermarketplace and related markets during 2000-2001. Staff's investigation has included a review of a wide variety of factors and behaviors that may have influenced electric andnatural gas prices in the West over this period.

7. In August 2002, Staff released its Initial Report on potential manipulation ofelectric and natural gas prices in these markets, in which it concluded certain conductwas gaming while other practices were legitimate practices.5 The Initial Report notedthat data requests were sent to over 130 sellers of wholesale electricity; entities from allsectors of the industry may have engaged in such trading practices. (Based on theanalysis in the Initial Report, the ISO subsequently designed market screens in an effortto review its transaction data and identify potential transactions with characteristicsindicative of these trading practices, including the practices that were identified by Staffas legitimate practices; the ISO's results are discussed below.) Staff expressly noted inthis Initial Report, however, that its investigation into certain matters was ongoing andthat other areas of inquiry and recommendations not addressed in its Initial Report may


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6In the Initial Report, Staff also recommended that the Commission initiate FPAsection 206 proceedings against Enron and three of its trading partners. See El PasoElectric Co., et al., 100 FERC ¶ 61,188 (2002) (El Paso Electric); Portland GeneralElectric Co. and Enron Power Marketing, Inc., 100 FERC ¶ 61,186 (2002) (Portland);Avista Corporation, et al.,100 FERC ¶ 61,187 (2002) (Avista Corp.). Those cases are invarious stages of progress, with full or partial settlements having been proposed in some.

A settlement agreement between Trial Staff and Avista Corporation was filed onJanuary 30, 2003 in Avista Corp. Comments in opposition to the agreement were filedon February 19, 2003, by the City of Tacoma, Washington and the California AttorneyGeneral. On May 15, 2003, Trial Staff amended its study in support of the settlementagreement and requested that the agreement be certified to the Commission. Additionalcomments were filed by Tacoma and California on May 27, 2003, with reply commentsfiled by Trial Staff and Avista Corporation. The settlement agreement is awaiting adetermination by the Chief Judge on whether it should be certified. Moreover, on April9, 2003, the Chief Judge issued an order in Avista Corp. in which he determined that thesettlement or hearing in that proceeding will cover all issues raised by the Staff FinalReport. Avista Corp. and Avista Energy Inc., Order of the Chief Judge ConfirmingRulings Made at Prehearing Conference and Establishing Further Procedures, DocketNo. EL02-115-000 (issued April 9, 2003). Therefore, this order does not address AvistaCorp.

In the El Paso Electric proceeding, on May 28, 2003, the judge certified anuncontested settlement to the Commission with a recommendation that it be accepted. ElPaso Electric Company, et al., 103 FERC ¶ 63,036 (2003). Accordingly, this order doesnot address El Paso Electric.

Further, this order only addresses issues that are not being litigated in the on-goingPortland proceeding.

7Final Report on Price Manipulation in Western Markets: Fact-FindingInvestigation of Potential Manipulation of Electric and Natural Gas Prices, Docket No.PA02-2-000 (March 26, 2003) (Staff Final Report). The Staff Final Report is availableon the Commission's website at <<http://www.ferc.gov/western>>.

be included in its Final Report.6 The Staff Final Report on its fact-finding investigationwas publicly released on March 26, 2003.7


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8See California Independent System Operator Corp., 82 FERC ¶ 61,327 at 62,291(1998); California Power Exchange Corp., 82 FERC ¶ 61,328 at 62,296 (1998); cf. AESSouthland, Inc., et al., 94 FERC ¶ 61,248 at 61,873 & nn. 25-27, order approvingstipulation and consent agreement, 95 FERC ¶ 61,167 (2001).

In relevant part, the terms of the two tariffs, the ISO's tariff and the PX's tariff, aresubstantially identical. Thus, for convenience, we often refer below only to the ISO'stariff.

9ISO's MMIP 2.1.3. As explained below, the MMIP is part of the ISO tariff.

10MMIP 2.1.1.

11See Department of Market Analysis, California ISO, Analysis of Trading andScheduling Strategies Described in Enron Memos, (October 4, 2002), publicly releasedon January 6, 2003, available at<<http://www.caiso.com/docs/2003/03/26/2003032613435514289.pdf>> (last viewedJune 9, 2003); Addendum to October 4, 2002 Report on Analysis of Trading andScheduling Strategies Described in Enron Memos: Revised Results for Analysis ofPotential Circular Schedules (“Death Star” Scheduling Strategy), (January 17, 2003),available at <<http://www.caiso.com/docs/2003/03/26/2003032613593115924.pdf>> (last viewed June 9, 2003); and Supplemental Analysis of Trading and SchedulingStrategies Described in Enron Memos, (June 2003), available at<<http://www.caiso.com/docs/2003/06/18/2003061806053424839.pdf>> (last viewedJune 18, 2003), (collectively, ISO Report). The ISO released its June 2003 SupplementalAnalysis after the issuance of the Staff Final Report. The Commission has reviewed theISO's Supplemental Analysis.

8. Since 1998, the ISO and PX tariffs have contained provisions that identify andprohibit “gaming” and "anomalous market behavior" in the sale of electric power.8 Asexplained in more detail below, the ISO tariff, through the ISO's Market Monitoring andInformation Protocol (MMIP), defines gaming, in part, as “taking unfair advantage of therules and procedures set forth in the PX or ISO tariffs, Protocols or Activity Rules . . . tothe detriment of the efficiency of, and of consumers in, the ISO Markets."9 The ISOtariff, through the MMIP, defines anomalous market behavior, in part, as "behavior thatdeparts significantly from the normal behavior in competitive markets that do not requirecontinuing regulation or as behavior leading to unusual or unexplained marketoutcomes."10 The Staff Final Report, among other things, cites to a study by the ISO,11 inwhich the ISO identifies activities that purport to fall within the definitions of gaming


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12San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Serv., et al., 101FERC ¶ 61,186 (2002) (Discovery Order).

13Id. at P 27.

14San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Serv., et al., 102FERC ¶ 61,164 (2003), reh'g pending (Rehearing Order).

On the same day, the Commission expanded the coverage of these responses toinclude the proceeding in Docket No. EL01-10-007. See Puget Sound Energy, Inc., et al.v. All Jurisdictional Sellers of Energy and/or Capacity at Wholesale into Electric Energyand/or Capacity Markets in the Pacific Northwest, Including Parties to the WesternSystems Power Pool Agreement, 102 FERC ¶ 61,163 (2003).

15San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Serv., et al., 102FERC ¶ 61,194 (2003) (February 24, 2003 Order).

16Attachment E to this order lists the parties that submitted 100 Days Evidence. Much of the 100 Days Evidence consisted of sworn testimony and affidavits.

and/or anomalous market behavior identified in the ISO tariff, and which occurredduring the period January 1, 2000 to June 20, 2001.

9. In addition, on November 20, 2002, the Commission issued an order that allowedparties in Docket Nos. EL00-95-000, EL00-95-048, EL00-98-000 and EL00-98-042 toconduct additional discovery into market manipulation by various sellers during thewestern power crisis of 2000 and 2001, and specified procedures for adducing thisinformation.12 The Discovery Order allowed the parties to conduct discovery, review thematerial and submit directly to the Commission additional evidence and proposed newand/or modified findings of fact based upon proffered evidence that is either indicativeor counter-indicative of market manipulation, no later than February 28, 2003.13 OnFebruary 10, 2003, the Commission issued an order affording parties an opportunity torespond to submissions made by adverse parties.14 The Rehearing Order allowed partiesto file reply comments directly with the Commission by March 17, 2003. TheCommission in a later order extended the February 28, 2003 deadline to March 3, 2003,and allowed the reply comments to be filed by March 20, 2003.15 These filings arereferred to as the "100 Days Evidence."16

10. On March 5, 2003, the Commission issued a notice providing that theCommission intended to release: (1) all documents submitted in Docket No. PA02-2-


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17Notice of Intent to Release Information and Opportunity to Comment, 68 Fed.Reg. 11,821 (March 12, 2003).

18Fact Finding Investigation of Potential Manipulation of Electric and Natural GasPrices, et al., 102 FERC ¶ 61,311 (2003).

19Fact-Finding Investigation into Possible Manipulation of Electric and NaturalGas Prices, 103 FERC ¶ 61,016 (2003).

20These commenters are listed in Attachment F.

21San Diego Gas & Elect. Co. v. Sellers of Energy and Ancillary Serv., et al., 96FERC ¶ 61,120 at 61,506-11 (July 25, 2001 Order), order on clarification and reh'g, 97FERC ¶ 61,275 (2001).

000, except documents obtained from other Federal agencies in accord with the FederalRecords Act, 44 U.S.C. §3510(b), and (2) all documents submitted in response to theDiscovery Order and Rehearing Order.17 On March 21, 2003, the Commission issued anorder directing the release of information no later than March 26, 2003 in accordancewith the above notice.18

11. Finally, by order issued on April 2, 2003,19 the Commission provided for thesubmission of briefs on Commission Staff's interpretation of the MMIP provisionsconcerning gaming and anomalous market behavior as prohibiting certain practices bymarket participants. Thirty-three parties filed in response.20 Their comments arediscussed below in the section on the MMIP provisions.

III. Discussion

A. The Commission's Authority in this Case

1. Commission Authority with Respect to thePeriod Prior to October 2, 2000

12. In our July 25, 2001 order21 and the November 1, 2000 Order in the CaliforniaRefund Proceeding, we established a refund effective date (October 2, 2000) concerningthe market manipulation allegations at issue in that proceeding, based on the evidenceavailable at that time and the refund limitations set forth in section 206 of the Federal


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2216 U.S.C. § 824e (2000).

2396 FERC at 61,507-08, citing Washington Water Power Co., 83 FERC ¶ 61,282(1998). See also Gynsburg v. Rocky Mountain Natural Gas Co., 90 FERC ¶ 61,247 at61,825-26, reh'g denied, 93 FERC ¶ 61,180 at 61,587 (2000); Public Service Co. ofColorado, 85 FERC ¶ 61,146 at 61,588 (1998).

24See December 19, 2001 Order, 97 FERC at 61,239 (the Commission can orderequitable remedies, such as disgorgement, for unjust enrichment); accord. AESSouthland, Inc. and Williams Energy Marketing & Trading Corp., 95 FERC ¶ 61,167 at61,538 (2001); Transcontinental Gas Pipe Line Corp. v. FERC, 998 F.2d 1313 (5th Cir.1993).

25See 16 U.S.C. § 824(f) (2000).

Power Act (FPA).22 As such, we did not include within the scope of that proceeding,conduct relating to a portion of the period at issue here, i.e., for the period from January1, 2000 to October 2, 2000. In doing so, however, we noted that the Commission couldtake action to address earlier periods if, during those earlier periods, a seller did notcharge the filed rate or violated tariffs.23 Thus, for the period prior to the October 2,2000 refund effective date, the Commission can order disgorgement of monies above thepost-October 2, 2000 refunds ordered in the California Refund Proceeding, if we findviolations of the ISO and PX tariffs. Further, while refund protection has been in effectfor sales in the ISO and PX short-term energy markets since October 2, 2000, theCommission can additionally order disgorgement of unjust profits for tariff violationsthat occurred after October 2, 2000 (i.e., to June 20, 2001).24

2. Commission Authority with Respect toGovernmental Entities

13. We note that several of the Identified Entities are governmental entities, subject tothe jurisdictional exemption set forth in section 201(f) of the FPA.25 In the July 25, 2001Order, as reiterated in the December 19, 2001 Order, the Commission found that refundliability should apply to energy sold in the ISO and PX short-term energy markets,including that sold by governmental entities. Here, as well, we find that thedisgorgement of unjust profits for the pre-October 2, 2000 period, should apply to salesmade by governmental entities as well as to those sales by the other Identified Entities.

14. In the July 25, 2001 Order, the Commission explained that its jurisdiction attachedto "the subject matter of the affected transactions: wholesale sales of electric energy in


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26July 25, 2001 Order, 96 FERC at 61,512; accord id. at 61,511-13.

27Id. at 61,513 (footnote omitted); accord id. at 61,511-13. On rehearing, theCommission reaffirmed its jurisdiction over these transactions. December 19, 2001Order, 97 FERC at 62,180-87.

interstate commerce through a Commission-regulated centralized clearinghouse that set amarket clearing price for all wholesale seller participants, including [governmentalentities]" and thus that jurisdiction may properly be asserted over sales by governmentalentities.26 The Commission continued:

Here, the central transactions, wholesale sales of energy ininterstate commerce, were governed by FERC-approved rulesand a FERC-jurisdictional ISO and PX . . . [and] thus fellwithin FERC's jurisdiction regardless of the jurisdictionalnature of the sellers or buyers. Further, the centralizedwholesale spot electricity markets operated by the CaliforniaISO and PX were established (and have been modified)subject to FERC review and approval. Because the marketdid not exist prior to FERC authorization, all those whoparticipated in the market had to recognize the controllingweight of FERC authority. Moreover, it is fair that all thosewho benefitted from this market also bear responsibility forremedying any potential unlawful transactions that mighthave occurred in the market.

* * * * *

Consequently, if the price for a specific sale is found to beunjust and unreasonable, then all sellers who obtained thatprice received an unjust and unreasonable rate. To the extentthe Commission determines refunds are an appropriateremedy for that sale, consumers can only be made whole byrefunds from all sellers who received the excessive price. As[governmental entity] sellers of energy and ancillary servicesaccounted for up to 30 percent of all sales in the Californiacentralized ISO and PX spot markets, excluding them from apotential refund remedy could have a serious detrimentaleffect on consumers.[27]


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28As further explained below, the MMIP has been part of the ISO's and PX filedtariffs since 1998.

29Staff Final Report, ch. VI at 6-7.

30MMIP 1.1.

31Staff Final Report, ch. VI at 7-10.

15. This rationale applies equally in the context of violations of MMIP provisions thatprohibit gaming and/or anomalous market behavior, as such provisions apply to alltransactions in the California market.

B. The MMIP's Provisions Concerning Gaming and/orAnomalous Market Behavior

1. Provisions Cited in the Staff Final Report

16. Concerning the Commission's remedial authority with respect to the IdentifiedEntities' alleged practices, the Staff Final Report notes that the MMIP is one of severalprotocols that the Commission required the ISO and PX to include as part of their filedrate schedules.28 The Staff Final Report also cites the underlying purposes of theMMIP,29 discussed in MMIP 1.1 (Objectives) which provides in pertinent part:

This Protocol sets forth the workplan and, where applicable,the rules under which the ISO will monitor the ISO Marketsto identify abuses of market power, to ensure to the extentpossible the efficient working of the ISO Marketsimmediately upon commencement of their operation, and toprovide for their protection from abuses of market power inboth the short term and the long term, and from other abusesthat have the potential to undermine their effectivefunctioning or overall efficiency in accordance with Section16.3 of the ISO Tariff.[30]

17. The Staff Final Report also cites Part 2 of the MMIP which specifies what aretermed "Practices Subject to Scrutiny." Among those practices are two that the StaffFinal Report identifies as being of particular concern to the Commission; the first is"gaming," and the second is "anomalous market behavior."31 Gaming is defined atSection 2.1.3 of the ISO's MMIP as follows:


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32MMIP 2.1.3.

[T]aking unfair advantage of the rules and procedures setforth in the PX or ISO Tariffs, Protocols or Activity Rules, orof transmission constraints in periods in which existsubstantial Congestion, to the detriment of the efficiency of,and of consumers in, the ISO Markets. “Gaming” may alsoinclude taking undue advantage of other conditions that mayaffect the availability of transmission and generation capacity,such as loop flow, facility outages, level of hydropoweroutput or seasonal limits on energy imports from out-of-state,or actions or behaviors that may otherwise render the systemand the ISO Markets vulnerable to price manipulation to thedetriment of their efficiency.[32]

18. Anomalous market behavior is defined at Section 2.1.1 of the ISO's MMIP:

"Anomalous market behavior” . . . is . . . behavior that departssignificantly from the normal behavior in competitivemarkets that do not require continuing regulation or asbehavior leading to unusual or unexplained market outcomes.Evidence of such behavior may be derived from a number ofcircumstances, including:

withholding of Generation capacity under circumstances in which itwould normally be offered in a competitive market;

unexplained or unusual redeclarations of availability by Generators;

unusual trades or transactions;

pricing and bidding patterns that are inconsistent with prevailingsupply and demand conditions, e.g., prices and bids that appearconsistently excessive for or otherwise inconsistent with suchconditions; and


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33MMIP 2.1.1.5 further provides that:

The Market Surveillance Unit shall evaluate, on an ongoingbasis, whether the continued or persistent presence of suchcircumstances indicates the presence of behavior that isdesigned to or has the potential to distort the operation andefficient functioning of a competitive market, e.g., thestrategic withholding and redeclaring of capacity, andwhether it indicates the presence and exercise of marketpower or of other unacceptable practices.

34See Staff Final Report, ch. VI at 8-10.

35MMIP 7.3.

36As the Staff Final Report notes, and as discussed in more detail below, theMMIP has been part of the ISO and PX tariffs on file with the Commission since 1998,which encompasses the relevant period of January 1, 2000 through June 20, 2001.

unusual activity or circumstances relating to imports from or exportsto other markets or exchanges.[33]

2. The Staff Final Report's Interpretation ofthe MMIP34

19. In brief, the Staff Final Report interprets the MMIP as "rules of the road" whichthe Commission may enforce, and as barring the kinds of practices at issue here. TheStaff Final Report explains that the MMIP enumerates objectionable practices, the MMIPauthorizes the ISO to impose "sanctions and penalties" or to refer matters to theCommission for appropriate sanctions or penalties,35 and the MMIP was part of the ISOand PX tariffs on file with the Commission during the relevant period.36 Accordingly,entities that transact through the ISO or PX and engage in such enumerated practices arein violation of filed tariffs. Further, the Staff Final Report concludes that variouspractices were violations of the MMIP and thus violations of the ISO's and PX's filedtariffs.


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37E.g., the California Parties, which include the California Attorney General andthe California Public Utilities Commission, among others.

38E.g., California Generators (Mirant, Dynegy, Williams), Competitive SupplierGroup (Aquila, Aquila Merchant Services, Arizona Public Service Company, AvistaEnergy, Constellation Power Source, Coral Power, El Paso Merchant Energy, IDACORPEnergy, Idaho Power Company, Pinnacle West Capital Corporation, Portland GeneralElectric, Puget Sound Energy, and Sempra Energy Trading Corp.), Enron, and Reliant.

3. Comments Regarding the Staff FinalReport's Interpretation of the MMIP

a. Supporting Comments

20. Several commenters supported the Commission Staff's interpretation of theMMIP.37 They argue that: (1) the MMIP is on file with the Commission as part of afiled tariff, and has been for some time, and thus can be enforced by the Commission; (2) the MMIP applies to all market participants, and is expressly intended to identify abusesand to provide for protection from such abuses; (3) the MMIP provides that the practicesthat are expressly subject to scrutiny are gaming and anomalous market behavior, andeach is defined in some detail; (4) while the MMIP does not expressly prohibit suchGaming Practices as "ricochet" or "get shorty," such a standard would require a level ofdetail that would be impossible to achieve, and it would require anticipating all of themyriad ways that could be dreamed up to "game" the markets, and to spell them all out inthe MMIP; (5) it is hard to conceive that market participants as sophisticated as thosehere did not realize that the kind of trading practices at issue here were inappropriate; and(6) as part of a filed tariff, the MMIP ultimately is for the Commission to interpret andenforce, and the MMIP itself recognizes that the Commission is the ultimate enforcementauthority.

b. Opposing Comments

21. Several parties filed comments opposing Commission Staff's interpretation of theMMIP.38 They argue that: (1) the MMIP was intended to provide direction to the ISOand not be a standard by which the Commission prosecuted market participants' conduct;(2) the MMIP does not expressly bar any trading practices; and (3) the MMIP does notidentify with precision the particular strategies that are subject to scrutiny, and thus, it istoo vague to serve as a standard by which to judge market participants' conduct. Theyargue that the Commission cannot hold market participants responsible in thesecircumstances, when they have not had fair notice that the trading practices at issue here


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39Sections 2.3, 3.3.4 and 7.3 of the MMIP outline the procedures to be followedby the ISO and the PX when a market participant is found to have engaged in any of thesuspect practices delineated in the MMIP.

4016 U.S.C. §§ 824d, 824e, 825h (2000).

are prohibited. Further, they contend that there is extrinsic evidence indicating thatmarket participants, particularly including the ISO itself, did not view the MMIP as a barto the kind of trading practices at issue here or as a basis for ordering disgorgement ofunjust profits. In this respect, the parties argue that the Commission to date has neverindicated that it viewed the MMIP as a bar to such conduct; its orders, to the extent thatthey have touched on such matters at all, have, in fact, implied the contrary, according tothe opposing commenters. They also suggest that if the Commission initiates aninvestigation, it would discourage new investment.

c. Other Comments

22. The California Parties also argue that other tariff provisions may have beenviolated, citing the following tariff provisions from the ISO Tariff: (1) Section 5.5.1(Planned Maintenance); (2) Section 5.5.3 (Forced Outages); (3) Section 5.3(Identification of Generating Units); (4) Section 5.4 (Western Systems CoordinatingCouncil (WSCC) Requirements); (5) Section 2.2.7.2 (Submitting Balanced Schedules);(6) Section 2.5.22.11 (Failure to Conform to Dispatch Instructions); and (7) Section 20.3(Confidential Information).

3. Commission Determination

23. The MMIP puts market participants on notice regarding their rights andobligations in the marketplace. It serves as the rules of the road for market participants. It also contemplates that these rules will be enforced by the Market Surveillance Unit, inthe form of monitoring and reporting, or by the appropriate body or bodies (includingthis Commission), in the form of corrective actions.39 While the Commission's role inthis regard may be triggered by the referral procedures outlined in the MMIP, theCommission also possesses the authority to enforce a filed tariff even in the absence of areferral.40 We agree with the Staff Final Report that one key function of the MMIP is toput market participants on notice as to the rules of the road for market participants, sothat the markets operated by the ISO are free from abusive conduct and may function asefficiently and competitively as possible. The Staff Final Report finds, and again weagree, that market participants cannot reasonably argue that they were not on notice thatconduct such as the Gaming Practices discussed below would be a violation of the ISO


Docket No. EL03-137-000, et al. - 17 -

41MMIP 3.3.4.

4216 U.S.C. §§ 824d, 824e (2000).

43Pacific Gas and Electric Co., et al., 81 FERC ¶ 61,320 at 62,471 (1997).

and PX tariffs. In short, the key function of the MMIP is to put market participants onnotice of what practices would be subject to monitoring and, potentially, corrective orenforcement action, by either the ISO in the first instance or by the Commission, whoserole includes enforcing the terms and conditions of filed rate schedules. Accordingly, itis appropriate for us to institute this proceeding.

24. MMIP 2.3 and its several subparts address how the ISO, including the MarketSurveillance Unit, is to respond to market participants engaging in any of the suspectpractices delineated in the MMIP. While the MMIP outlines intermediate steps (such asarranging for alternative dispute resolution or proposing language changes to the tariff),ultimately the MMIP directs the Market Surveillance Unit to refer matters to thisCommission for enforcement.41 The MMIP contemplates that, while the ISO may try tocorrect misconduct on its own, the Commission is to be "the court of last resort" formisconduct committed by market participants, including the gaming and/or anomalousmarket behavior misconduct defined in the MMIP. While Part 2 of the MMIPenumerates suspect practices, MMIP 7.3 authorizes the ISO to impose "sanctions andpenalties" or, as particularly relevant here, to refer matters to the Commission forappropriate sanctions or penalties.

25. We agree with the Staff Final Report that if entities are found to have engaged inthe identified misconduct, they will have violated the ISO's and PX's filed tariffs even ifsuch formal procedures as referral outlined in the MMIP did not occur. The Commissioncan enforce a filed tariff even when there are processes in that tariff which, had they beenused, would have assisted the Commission. Ultimately, the Commission can enforce afiled tariff with or without the assistance of a complaint or a referral.42

26. In this regard, we note that the ISO and PX each initially submitted its MMIP(along with other protocols), for informational purposes only, on October 31, 1997. TheCommission, however, found that the protocols, including the MMIP, “govern a widerange of matters which traditionally and typically appear in agreements that should befiled with and approved by the Commission.”43 The Commission accepted the protocols,including the MMIP, for filing, and directed the ISO and PX each to post the protocolson its Internet site and to file its complete protocols pursuant to Section 205 of the FPAwithin 60 days of the ISO’s and PX's Operations Date (that date ultimately was April 1,


Docket No. EL03-137-000, et al. - 18 -

44Id. The ISO (in Docket No. EC96-19-029, et al.) and PX (in Docket No. EC96-19-28, et al.) each made that compliance filing on June 1, 1998.

45See Staff Final Report, ch. VI at 4-6.

46For a more detailed description of the day-ahead auction process, see the StaffFinal Report, ch. VI at 5.

1998).44 Accordingly, the MMIP has been part of the ISO’s and PX's filed tariffs since1998, which includes the period January 1, 2000 to June 20, 2001 at issue here.

27. With respect to tariff provisions besides the MMIP cited by the California Parties: (1) the WSCC requirements cited by the California Parties make no reference to gamingstrategies or anomalous market behavior (as does the MMIP), and therefore, thoseprovisions do not provide a basis for finding gaming and/or anomalous market behavior;and (2) conduct involving arbitrage, underscheduling and confidentiality of certain datais addressed below in the discussion of Gaming Practices and California Practices. Weare also currently investigating alleged violations related to physical withholding.

C. Overview of PX and ISO Operations

28. The Staff Final Report provides an overview of the ISO and PX operations andtrading rules in order to put the alleged practices in the context of Western energymarkets.45 This overview is recited below.

29. The ISO operates much of the transmission grid in California and is responsiblefor real-time operations, such as continually balancing generation and load and managingcongestion on the transmission system it controls. In California, a certified schedulingcoordinator is the intermediary between the ISO and the ultimate customer. UnderCalifornia’s restructuring legislation, the PX was created primarily to operate twomarkets in which energy was traded on an hourly basis. These were the day-ahead andday-of markets. These markets established a single clearing price for each hour acrossthe entire ISO control area, provided there were no transmission constraints. Wheretransmission congestion existed, a separate clearing price was established for eachtransmission constrained area or zone in California. Each zonal clearing price was basedon adjustment bids submitted by sellers and buyers. The adjustment bids represented thevalue to an entity of increasing or decreasing (i.e., adjusting) its use of the system. Inessence, this is a redispatch of the system to deal with congestion.46


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47Id. at 5-6.

48Id. at 6.

49Id. at 4.

30. The ISO operates a variety of markets in order to procure the resources necessaryto reliably operate the transmission system, including a day-ahead market and an hour-ahead market for relieving transmission congestion and an energy market to continuouslybalance the system’s energy needs in real time. The latter real-time market is the finalenergy market to clear chronologically, after all other markets in the region clear. Bilateral spot markets at trading hubs outside California generally operated in the timeperiod between the close of the PX market and the ISO real-time market.47

31. As the Staff Final Report notes, understanding the interaction of the PX and ISOspot markets with all their complexities, together with the different market operationsoutside of California, is crucial to understanding and analyzing the impact of the variousconduct discussed below. An example of these complexities is the transmissioncongestion management system. A transmission path is “congested” when totalschedules exceed the available transmission capacity of the facilities. The ISO used, assuggested above, a zone-based approach to alleviate congestion. Sellers and buyerssubmitted adjustment bids identifying the prices they were willing to use to increase ordecrease their generation on demand to relieve congestion in a particular zone. However,the software used by the ISO to evaluate adjustment bids did not accept prices that werehigher than the ISO price cap. These and other complexities created an opportunity forthe market participants to engage in the conduct described below.48

32. In addition, it is important to remember that California’s restructuring planrequired the three California public utilities (Southern California Edison Company(SoCal Edison), San Diego Gas & Electric Company (SDG&E), and Pacific Gas andElectric Company (PG&E)) to sell all of their generation resources into the PX and tobuy all of their energy needs from the PX. This made the PX by far the largestscheduling coordinator in California, representing at times close to 90 percent of the loadserved by the ISO grid. This requirement that the three public utilities exclusively usethe PX was critical in the restructuring program, since this was how the three publicutilities were to calculate savings from using the new market structure and apply thosesavings to recover their stranded costs.49

33. Thus, under the California restructuring rules, the three California public utilitieswere both buyers and sellers in the PX. The prices paid for buying back their own


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50Id. at 4-5. As noted in the Commission’s December 15, 2000 Order, 93 FERC at62,002 & n.54, stranded cost estimates showed that by then PG&E had collected $8.3billion, and SoCal Edison had collected $9.3 billion; SDG&E had fully recovered itsstranded costs earlier in 2000. Staff Final Report, ch. VI at 5.

51See Prepared Testimony of Dr. Peter Fox-Penner on Behalf of California Parties,Exhibit No. CA-1, and Appendices to Prepared Testimony of Dr. Peter Fox-Penner onBehalf of California Parties, Exhibit No. CA-2 attached to California Parties'Supplemental Evidence Filing in Docket No. EL00-95-075, et al. (filed March 3, 2003).

resources through the PX served to value those resources for stranded cost purposes. Aslong as the three public utilities paid less than the frozen retail rates, they used thedifference to write off stranded costs. This formula broke down, however, when thepublic utilities had to buy back their resources at more than the frozen retail rates.50

D. Gaming Practices and California Practices

34. Since the inception of the Commission's investigation into whether any entitymanipulated prices in the electricity and gas markets in the West and the release of thefirst Enron memorandum in May 2002 discussing its trading strategies, there have been amultitude of studies and reports written about the alleged inappropriate conduct inCalifornia by market participants during 2000 and 2001. In addition to the Staff FinalReport that addresses these issues, we have reviewed the ISO Report and the severalstudies and testimony by witnesses submitted in the 100 Days Evidence. Most notableamong the testimony submitted with respect to alleging gaming conduct by marketparticipants are the testimony and studies conducted by Dr. Peter Fox-Penner.51

35. As a result of our review and analysis of this material, the Commission hasdetermined that some of these alleged gaming practices violated the MMIP. As to thosepractices that violated the MMIP (hereafter collectively referred to as the GamingPractices), we found two categories of violations: (1) Gaming Practices that violated theMMIP and for which we are seeking disgorgement of all unjust profits received as aresult of those violations; and (2) Gaming Practices that violated the MMIP, but forwhich there were no unjust profits earned or other countervailing and mitigatingcircumstances existed that caused the market participants to engage in the GamingPractices such that it would not be just for the Commission to seek the disgorgement ofunjust profits.

36. We have determined that certain of the market participants' practices did notviolate the MMIP, and we are not pursuing market participants for having engaged in


Docket No. EL03-137-000, et al. - 21 -

52 "Out-of-market purchases" refers to all generation purchased by the ISO thatwas not bid into the market or was bid at a price above the effective price cap. Out-of-market purchases were especially frequent prior to the implementation of the "mustoffer" requirement effective on May 29, 2001, which mandates that all generators withparticipating generator agreements with the ISO provide available generation to the ISOunless the ISO grants a waiver. See San Diego Gas & Electric Co., 95 FERC ¶ 61,115(implementing the must offer requirement), clarified, 95 FERC ¶ 61,275 (2001).

53See MMIP 2.1.3.

such activities (hereafter collectively referred to as the California Practices). Rather, wefind that the California Practices did not violate the ISO tariff or any rule, and wererecognized and widely accepted as appropriate arbitrage activity.

1. Gaming Practices

a. False Import

37. This practice, which is also known as "Ricochet" or "Megawatt Laundering," tookadvantage of the price differentials that existed between the day-ahead or day-of marketsand out-of-market sales in the real-time market. A market participant made arrangementsto export power purchased in the California day-ahead or day-of markets to an entityoutside the state and to repurchase the power from the out-of-state entity, for which theout-of-state entity received a fee. The "imported" power was then sold in the Californiareal-time market at a price above the cap.

38. The essence of the False Import practice was to "park" day-ahead or day-ofCalifornia energy with a company outside of California, buy it back for a small fee andthen sell it to the ISO as "imported" out-of-market power. When power was parkedunder this practice, no power actually left the state of California. The reason for creatingthis fictional import was to take advantage of the fact that the ISO was making out-of-market purchases that were not subject to the price cap during real time whenever therewas insufficient supply bid into its market.52 The ISO buyers responsible for obtainingthe energy needed in the real-time market were willing to pay a price above the cap forenergy imported from outside of California and accepted offers from sellers engaging inthe False Import practice.

39. Those market participants who engaged in the False Import practice violated theMMIP by unfairly taking advantage53 of the rules permitting energy to be purchased atprices above the cap in out-of-market purchases during real time and the ISO's practice


Docket No. EL03-137-000, et al. - 22 -

54As discussed below in section E, because the ISO Report and Dr. Fox-Penner'sstudies were broadly inclusive, we recognize that some of the transactions identified inthose reports may have been legitimate transactions and not Gaming Practices.

55The monetary remedy of disgorgement of unjust profits for this particularGaming Practice would be imposed only until such time as the mitigated market clearingprice was put in place for transactions, i.e., on June 21, 2001. Furthermore, during theperiod covered by the refund period (October 2, 2000 – June 21, 2001), see supra note 3,all spot market sales through the PX in the day ahead market are mitigated as are alltransactions with the ISO in the real time market. Therefore, both the energy price forthe export and the import are mitigated during this period. Accordingly, disgorgementfor this strategy will apply to only transactions between May 2000 and the start of therefund period on October 2, 2000.

56As noted above, supra notes 1 and 3, June 20, 2001 has been selected as the enddate of the relevant period in this proceeding. While the mitigation plan, which becameeffective on that date, was primarily intended to control the real-time energy market, italso had a disciplining effect on congestion costs and eliminated the opportunity to profitfrom Gaming Practices. The ISO Market Analysis Report for June 2001 shows that the

(continued...)

of permitting such uncapped purchases for imported power. More precisely, the marketparticipants engaging in False Import deceived the ISO by falsely representing that theiravailable power had been imported in order to receive a price above the cap. In fact,however, the generation was California generation, and no power had left the state in thefictional export-import parking transaction.

40. Based on the ISO Report and studies by Dr. Fox-Penner,54 the following partiesmay have engaged in the False Import Practice in violation of the MMIP and unjustlyreceived prices in excess of the cap for energy that was falsely represented as beingimported energy: (1) Aquila, Inc.; (2) Arizona Public Service Company; (3) BonnevillePower Administration; etc., as set forth in Attachment A to this Order.55

b. Congestion-Related Practices

41. According to the ISO rules, market participants received congestion reliefpayments for relieving flows in the direction of congestion or increasing counterflows inthe opposite direction. There were four practices that market participants engaged in thatinvolved false scheduling of load or counterflow energy that appeared to relievecongestion in real time so that they could receive congestion payments.56


Docket No. EL03-137-000, et al. - 23 -

56(...continued)average price of real-time electricity in June decreased 62 percent to $104/MWh from theMay 2001 average of $275/MWh and total congestion costs for June 2001 were $0.5million, down from $7 million in May 2001. A. Sheffrin, Market Analysis Report forJune 2001, (July 20, 2001), available at<<http://www.caiso.com/docs/2001/07/20/200107201733319105.pdf>>.

42. The first such Congestion-Related practice is referred to as Cutting Non-firm, alsosometimes known as Non-firm Export. This practice involved the scheduling ofnon-firm power by a market participant that did not intend to deliver or cannot deliverthe power. Upon receipt of the congestion payment for cutting the schedule, the marketparticipant then canceled the non-firm power after the hour-ahead market closed but keptthe congestion payment. No power was transmitted and no congestion was relieved, butthe market participant was paid for congestion relief. In some instances, the marketparticipant may have submitted a schedule for non-firm power that it, in fact, had notacquired.

43. The second Congestion-Related practice is Circular Scheduling, also sometimesreferred to as "Death Star." The Circular Scheduling practice involved the marketparticipant scheduling a counterflow in order to receive a congestion relief payment. Inconjunction with the counterflow, the market participant scheduled a series oftransactions that included both energy imports and exports into and out of the ISOcontrol area and a transaction outside the ISO control area in the opposite direction of thecounterflow back to the original place of origin. With the same amount of powerscheduled back to the point of origin, however, power did not actually flow andcongestion was not relieved. Circular Scheduling was profitable as long as thecongestion relief payments were greater than the cost of scheduled transmission.

44. The third Congestion-Related practice was Scheduling Counterflows on Out-of-Service Lines, also sometimes referred to as "Wheel Out." This practice involved amarket participant submitting a schedule across an intertie line at the ISO border that wasknown to be out of service and had been derated to zero capacity, thus creating artificialcongestion. The market participant would then schedule a counterflow export, a "wheelout," and be paid for congestion relief in the day-ahead or hour-ahead market. However,because the line was completely constrained, the initial schedule was certain to be cut bythe ISO in real time and the market participant would receive a congestion payment forenergy it did not actually supply.


Docket No. EL03-137-000, et al. - 24 -

45. The fourth Congestion-Related practice, known as "Load Shift," involved amarket participant underscheduling load in one zone in California and overschedulingload in another, thereby increasing congestion in the direction of the overscheduled zone. Congestion "relief" occurred when the market participant later adjusted the twoschedules to reflect actual expected loads. This adjustment created a counterflow towardthe underscheduled zone, earning the market participant a congestion relief paymentfrom the ISO. The market participant had to own Firm Transmission Rights (FTRs) inthe direction of the overscheduled zone to cover its exposure to ISO congestion charges,but any of the FTRs that it did not use may have earned artificially high FTR paymentsfrom the ISO.

46. Each of the four Congestion-Related practices violated the MMIP because themarket participants submitted false schedules to the ISO. In the cases of Cutting Non-firm, Circular Scheduling, and Scheduling Counterflows on Out-of-Service Lines, themarket participants fraudulently received congestion relief payments for energy that wasnever provided and did not relieve congestion. Similarly, market participants whoengaged in the Load Shift practice received congestion payments for their FTRs as aresult of the very congestion that they created. As a result of these false representations,the market participants that engaged in these Congestion-Related practices unfairly tookadvantage of the ISO rules regarding payment for congestion relief.

47. Based on the ISO Report and studies by Dr. Fox-Penner, the following partiesmay have engaged in one or more of these four Congestion-Related Practices in violationof MMIP and unjustly received congestion payments: (1) American Electric PowerService Corp.; (2) Aquila, Inc.; (3) Duke Energy Trading and Marketing Company; etc.,as set forth in Attachment B to this Order.

c. Ancillary Services-RelatedPractices

48. There are three different practices that market participants engaged in thatinvolved selling ancillary services, also sometimes collectively referred to as "GetShorty." Two of these we consider to be Gaming Practices and violations of the MMIPand are discussed here. The third, we determine to be a form of legitimate arbitrage andis discussed below, in the section addressing the California Practices.

49. The first Ancillary Services-Related practice we refer to as Paper Trading. Thispractice involved selling ancillary services in the day-ahead market even though themarket participant did not have the required resources available to provide the ancillary


Docket No. EL03-137-000, et al. - 25 -

57See MMIP 2.1.3.

58ISO Tariff § 2.5.6.1 (applicable to generation within California); and ISO Tariff§§ 2.5.7.4.2 and 2.5.7.4.3 (applicable to resources outside of California).

59Section 2.5.22.11 of the ISO Tariff (Failure To Conform To DispatchInstructions) requires that resources that have been committed to provide ancillaryservices for a given period must be available and capable of providing the services forthe full duration of the period.

services. The market participant then bought back these ancillary services in thehour-ahead market at a lower price.

50. The second Ancillary Services-Related practice we refer to as Double Selling. This practice involved selling ancillary services in the day-ahead market from resourcesthat were initially available, but later selling those same resources as energy in the hour-ahead or real-time markets.

51. Market participants that engaged in Paper Trading and/or Double Selling violatedthe MMIP since they unfairly took advantage57 of the market rules by using falserepresentations and/or receiving payments for services that they did not provide. Withrespect to Paper Trading, the ISO's tariff requires that any bid for the provision ofancillary services specify the generating unit, system unit, load or system resource whichwill be used to provide the ancillary service. Additionally, a scheduling coordinator mustidentify the specific operating characteristics of that resource which would qualify it toprovide ancillary services.58 However, market participants engaged in Paper Tradingfalsely represented that the resources were available to provide ancillary services whenthey were not actually available. Similarly, with respect to Double Selling, the marketparticipant misled the ISO by selling capacity that it had already committed to reserve asancillary services, thus making that capacity no longer available in real time if the ISOwere to call upon that resource to provide ancillary services. In addition to violating theMMIP, those market participants that engaged in Double Selling also violated Section2.5.22.11 of ISO tariff.59

52. Although the ISO Report includes a list of market participants that may haveengaged in Paper Trading, the ISO does not have the information necessary to determinethe extent to which the capacity for ancillary services sold in the day-ahead market andthen sold back in the hour-ahead was not actually available or could not have beenprovided. However, in a market notice, dated July 3, 2002, the ISO listed marketparticipants that received payments for ancillary services that were called upon but for


Docket No. EL03-137-000, et al. - 26 -

60California ISO, Ancillary Services Payments Rescinded Due to GeneratorUnavailability, Market Notice (July 3, 2002). For the convenience of parties, the ISO'sJuly 3, 2002 market notice is attached as Attachment G to this order.

61In the 100 Days Evidence, Seattle alleges that Avista, El Paso, Portland General,PowerEx, and Transalta engaged in all of the Gaming Practices. However, we have seenno evidence that any market participant engaged in Selling Non-Firm Energy as Firmother than Enron.

which they could not deliver the services.60 Based on the identification of marketparticipants in the July 3, 2002 market notice as well as the ISO Report, the Commissionbelieves that the following parties may have engaged in Paper Trading in violation of theMMIP and Section 2.5.22.11 of the ISO tariff and unjustly received payments forancillary services: (1) Arizona Public Service Co.; (2) Automated Power Exchange, Inc.;(3) Bonneville Power Administration; etc., set forth on Attachment C to this Order.

53. Based on the studies by Dr. Fox-Penner, the Commission believes that thefollowing parties may have engaged in Double Selling in violation of MMIP and unjustlyreceived payments for ancillary services: (1) Duke Energy Trading and Marketing Corp.;(2) Dynegy Power Marketing Inc., Dynegy Power Corp., El Segundo Power LLC, LongBeach Generation LLC, Cabrillo Power I LLC, and Cabrillo Power II LLC; (3) MirantAmericas Energy Marketing, LP, Mirant California, LLC, Mirant Delta, LLC, andMirant Potrero, LLC; and (4) Reliant Resources, Inc., Reliant Energy Power Generation,and Reliant Energy Services, Inc.; as set forth on Attachment D to this Order.

d. Selling Non-Firm Energy as Firm

54. The practice of Selling Non-Firm Energy as Firm involved Enron61 buying non-firm energy from outside California and then selling it to the ISO as firm energy. Enronwas able to derive an unjust profit from this practice because it avoided the cost ofpurchasing the operating reserves that are required for firm energy.

55. The practice of Selling Non-Firm Energy as Firm was a flagrant falserepresentation by Enron to the ISO. Thus, it was a violation of the MMIP.


Docket No. EL03-137-000, et al. - 27 -

62The Commission halted this practice created under California legislation (seeAB 1890 (September 23,1996)) and began allowing the utilities to procure resourcesunder long-term contracts in December 2000. See supra note 3.

63The Commission previously noted in several orders that the widespreadunderscheduling of load was taking place in the California markets, and directed changesto the market rules and allowed penalties, in an attempt to address the problem. SeeDecember 19, 2001 Order, 97 FERC at 62,226-27; December 15, 2000 Order, 93 FERCat 62,002-03; November 1, 2000 Order, 93 FERC at 61,361-62; and August 23, 2000Order, 92 FERC at 61,608.

(continued...)

2. Gaming Practices for Which Disgorgementof Unjust Profits Is Not Sought

a. Underscheduling Load

56. This practice was an effort by the load-serving entities, primarily the threeCalifornia utilities (PG&E, SoCal Edison, and SDG&E), to reduce the overall price paidfor generation. For months they understated their load consistently in schedulessubmitted to the PX in an effort to reduce the amount of generation purchased in the day-ahead market, thereby lowering the price. The remainder of the utilities' generationneeds would be purchased in the ISO's capped real-time market.

57. Under the then-existing market rules, the utilities were required to satisfy theirneed for energy with purchases from the PX and were to bid in their generation in the PXday-ahead market in an amount equal to their load.62 However, during 2000, in an effortto minimize their energy costs, the three California public utilities began to routinelyunderschedule their load in the PX day-ahead market. Due to the large size of the threeCalifornia public utilities, changes in their purchasing strategies had a significant impacton market outcomes, including the market-clearing prices in the PX day-ahead market. By moving a significant amount of their load out of the PX day-ahead market, lesssupply bids were needed to clear the market which, in turn, resulted in lower marketclearing prices in the PX day-ahead market. As a direct result of the underscheduling bythe three public utilities in the day-ahead market, however, the ISO had to meet a largerpercentage of the load in real time, causing serious operational and reliability problems.

58. Because Underscheduling Load required the utilities to submit false scheduleswith regard to their loads to the PX, this conduct was certainly troublesome and is notcondoned by the Commission.63 Moreover, it violated the MMIP by unfairly taking


Docket No. EL03-137-000, et al. - 28 -

63(...continued)

64MMIP 2.1.3.

65The phenomenon of market participants engaging in Overscheduling Load inresponse to the utilities' practice of Underscheduling Load was widely known andaccepted. See Report on California Energy Markets Issues and Performance: May-June,2000, Special Report, by Department of Market Analysis, California ISO, dated August10, 2000, pages 2-3, 25-37, available at<<http://www.caiso.com/docs/09003a6080/07/40/09003a6080074029.pdf>>.

advantage of the rules and caused a demonstrable detriment to the efficiency of themarket.64 Although we disapprove of the practice of Underscheduling Load and we havethe authority to order disgorgement of unjust profits, there are no profits to disgorgesince this was a price-reducing purchasing strategy.

b. Overscheduling Load

59. The practice of Overscheduling Load involved a market participant with moregeneration than load falsely overstating to the ISO its scheduled load to correspond withthe amount of generation in its schedule. This practice, also sometimes referred to as"Inc-ing" or "Fat Boy," permitted the market participant to be dispatched by the ISOduring real time to its full capacity and receive the real-time market clearing price eventhough it did not have scheduled load equal to its generation capacity when it bid into theday-ahead market. Thus, Overscheduling Load ensured that generation would not gounsold in the real-time market.

60. Overscheduling Load required the market participant to submit a false loadschedule to the ISO since the ISO required that only balanced schedules of load andgeneration could be bid into the day-ahead market. Although the submission of suchfalse schedules is a violation of the MMIP, there were countervailing circumstances thatexisted in the California market at the time that caused the market participants to engagein Overscheduling Load. The ISO rules required that all market participants submitschedules containing balanced levels of generation and load. However, as noted above,in an effort to minimize their procurement costs in the California market due to theinterplay between the PX and ISO rules, the utilities routinely underscheduled their load. The market participants who engaged in Overscheduling Load did so as a direct responseto the utilities' practice of Underscheduling Load.65 Overscheduling Load actuallyhelped reduce reliability problems in the real-time market. In fact, Overscheduling Load


Docket No. EL03-137-000, et al. - 29 -

66Some of the generators in the 100 Days Evidence indicated that the ISO hadencouraged the practice of Overscheduling Load to obtain needed supply. For example,Reliant stated that the ISO assisted it by creating an artificial load point, i.e., helped itprovide additional generation to the market. See Reliant's Reply to the March 3, 2003Submission of California Parties, Vol. I. Exhibit REL-27 at 33-34 (Docket No. EL00-95-089, et al., March 23, 2003). In addition, in explaining that Overscheduling Load did notcause or exacerbate the high price in May 2000, an ISO report states that the generationthat was overscheduled was not hidden from the ISO but was directly factored into theISO's decision about how much generation would be required to meet real time demand. E. Hildebrandt, ISO's Department of Market Analysis, Did Any of Enron's Trading andScheduling Practices Contribute to Outages in California? at 12-13 (November 15,2002), available at<<http://www.caiso.com/docs/2002/11/26/2002112610411219558.pdf>>.

67See ISO Tariff § 2.5.23.

was often actively encouraged by the ISO because it reduced the need for real-timeenergy due to the utilities' underscheduling.66 Finally, participants who engaged inOverscheduling Load did not set the market clearing price because, as uninstructedenergy, they were price takers who were paid the ex-post price for imbalance energywhich was set by the bid of the marginal unit dispatched.67 Therefore, we are not seekingdisgorgement of unjust profits from those market participants who engaged inOverscheduling Load.

3. California Practices

61. As noted, the Commission has determined that some of the conduct discussed inthe Staff Final Report and the 100 Days Evidence did not violate the MMIP or any othertariff violation. These California Practices were widely recognized and accepted asappropriate and legitimate practices, as discussed below. They did not involve any falserepresentations or take unfair advantage of ISO rules. Accordingly, we are not seekingto recover the profits earned by market participants as the result of engaging in suchconduct.

a. Export of California Power

62. This practice involved a purchase of power in the California day-ahead market ator below the price cap and then a resale of the power outside the state at a higher(uncapped) price. Unlike the False Import practice discussed above, energy is actuallyexported out of California.


Docket No. EL03-137-000, et al. - 30 -

68We note, however, that the ISO does have the authority to alter scheduleddeliveries of energy and ancillary services into or out of the ISO controlled grid to avert asystem emergency. See ISO Tariff § 5.6.1.

69In fact, this is precisely what arbitrage is – i.e., the purchase of a commodity,such as electricity, in one market (day-ahead), for immediate resale in another market(real-time) in order to profit from the unequal prices. As more parties engage inarbitrage, prices between the markets converge and the opportunity for profits shoulddisappear.

70There has been no evidence discovered to suggest that there was any collusionbetween market participants to export their energy outside of California in order to createscarcity within California.

71See California Independent System Operator Corporation, 82 FERC ¶ 61,327(1998) (Commission accepted ISO Tariff Amendment No. 4, which allowed schedulingcoordinators to buy back and sell ancillary services in the hour-ahead market).

63. This practice did not violate the tariffs or rules of the PX or ISO.68 Marketparticipants were engaging in arbitrage between the California market, which had pricecaps in effect, and markets outside of California that did not have price caps and wherethey could receive a higher price.69 This type of export practice has never beenprohibited and, to the extent it does not involve collusion with other marketparticipants,70 represents legitimate economically rational attempts by the marketparticipants to maximize their profits.

b. Ancillary Services-Related Practices - Arbitrage

64. As noted above, market participants engaged in several different practicesinvolving ancillary services. Two of those we discussed above (Paper Trading andDouble Selling) and we consider those practices to be Gaming Practices in violation ofthe MMIP. However, to the extent a market participant was merely taking advantage ofsystematic differences in the day-ahead and hour-ahead market prices for ancillaryservices by selling ancillary services in the day-ahead market and buying them back at alower price in the hour-ahead market, we find this practice to be consistent withlegitimate arbitrage.71 Thus, as long as the market participant had the generationavailable to provide the ancillary services or appropriately contracted for it, selling theenergy at one price and buying it back at a lower price did not violate the ISO rules or


Docket No. EL03-137-000, et al. - 31 -

72ISO Tariff §§ 20.3.1-20.3.3.

tariff and was nothing more than a method for the market participant to reap a validprofit from the price differential in the day-ahead and real-time markets.

c. Access to IIR Outage Data

65. For an annual fee, market participants could subscribe to a generation outagenotification service provided by Industrial Information Resources (IIR). IIR providedinformation to subscribers via daily e-mails and upon request regarding plant outages inthe West. The information sometimes included the cause of outages, prospective as wellas current plant outages, and expected start and end dates. IIR obtained informationdirectly from the generating plants.

66. In the 100 Days Evidence, the California Parties alleged that market participantswho utilized IIR violated the ISO tariff regarding confidentiality of outage data and thatsubscriptions to the IIR service raised issues under the antitrust laws. We disagree. TheISO tariff prohibits the ISO from revealing market participants' confidential outage data;the tariff does not prohibit the market participants providing the information to thirdparties and then subscribing to third-parties' services.72 Further, subscribing to a servicethat provides outage information does not mean that the subscribers used thatinformation to manipulate the market. There has been no evidence to suggest that thesharing of outage information was used to manipulate the market. Subscribing to IIR'sservice did not involve any false representations, rule violations, or violations of MMIP. Furthermore, no evidence was offered to suggest that any outage data was used in acollusive manner to raise prices.

E. Further Clarification as to What Constitutes GamingPractices

67. The screens used by the ISO and Dr. Fox-Penner are broadly inclusive and someof the characteristics that were used to identify potential Gaming Practices may also bepresent intransactions that were not actually Gaming Practices. In fact, the 100 DaysEvidence indicates that there may be legitimate explanations for many of the transactionsthat may initially appear to be Gaming Practices. As a result, the Identified Entities willhave an opportunity to submit evidence to the ALJ that may demonstrate that any or allof the transactions identified in the ISO Report or Dr. Fox-Penner's studies were notGaming Practices. For example, with respect to transactions identified as False Imports,evidence that may demonstrate that the transactions were legitimate transactions and notpart of a False Import practice might include establishing that: (a) the "imported" power


Docket No. EL03-137-000, et al. - 32 -

73We, thus, are exercising our prosecutorial discretion and not prosecutingConstellation Power Source, Inc. for False Import practice.

Further, we are exercising our prosecutorial discretion and not prosecuting,Calpine Corp., Idaho Power Company, Modesto Irrigation District, TransAlta Energy

(continued...)

was actually imported from outside the state of California and not a fictitious import, i.e.,not an export and import that constitutes a False Import, as described above; (b) thetransaction was designed to work around a transmission constraint (such as on Path 15)which limited the movement of power between two points within the ISO control area byusing an uncongested transmission path (such as the Pacific DC intertie) to move thepower to a point outside the ISO control area and back to its intended destination; (c) theexport and import were actually two independent and unrelated obligations such as a pre-existing long-term bilateral contractual export obligation followed by a real-time importfrom the same party in an unrelated transaction; or (d) the market participant wasimporting power on behalf of the ISO or California Department of Water Resources(California DWR), because suppliers were unwilling to assume the credit risk of dealingdirectly with the ISO or California DWR.

68. Similarly, evidence that may establish that transactions were not part of a CuttingNon-firm practice might be that, with respect to any energy that was scheduled, but didnot flow, the energy did not flow due to circumstances beyond the control of the marketparticipant and without prior knowledge by the market participant that the energy wouldnot flow. Regarding Paper Trading and Double Selling, evidence that may establish thatthe transactions, identified by the ISO and Dr. Fox-Penner, were not in fact GamingPractices, but were instead legitimate transactions might include showing that: (a) theresources to provide the ancillary services sold in the day-ahead market were actuallyavailable to the bidder; (b) ancillary services payments were not received for capacitythat was not available to provide ancillary services, or (c) the ISO requested that themarket participant provide energy in the real-time market even though it knew that suchenergy was being held for ancillary services previously sold to the ISO.

F. Identified Entities with Revenues of $10,000 or Less

69. We are exercising our prosecutorial discretion and not prosecuting certain of theIdentified Entities which the ISO Report states have earned revenues of $10,000 or lessfor a particular Gaming Practice and where we have no other basis to prosecute them forthat particular Gaming Practice.73 In the ISO's latest report analyzing various practices,


Docket No. EL03-137-000, et al. - 33 -

73(...continued)Marketing (U.S.) Inc. and TransAlta Energy Marketing (California), Inc., and WilliamsEnergy Services Corp. for Cutting Non-firm.

We, likewise, are not prosecuting Arizona Public Service Company, CalpineCorp., Hafslund Energy Trading, LLC, Portland General Electric Company, and PugetSound Energy, Inc. for Circular Scheduling.

We, similarly, are not prosecuting Calpine Corp., City of Vernon, ConstellationPower Source, Inc., Public Service Company of New Mexico and Portland GeneralElectric Company for Paper Trading.

74ISO Report at 3-4 (June 2003) .

75We will incorporate the Staff Final Report and the underlying record in DocketNo. PA02-2-000 by reference into the record in this proceeding.

the ISO states that its analysis includes market participants with a relatively small numberof transactions and revenues from particular practices. The ISO explains that the smallerthe volume of transactions and the revenues identified for individual market participants,the less the likelihood that the transactions represent prohibited Gaming Practices. TheISO, in fact, recommends applying a minimum threshold in any further investigations ofthese practices.74 We agree that the burden and costs to both the parties and theCommission associated with litigating whether market participants whose revenues wereless than $10,000 for particular Gaming Practices engaged in those practices may exceedany unjust profits on the revenues that resulted from such transactions. Accordingly, weare exercising our prosecutorial discretion and not proceeding against certain IdentifiedEntities for particular Gaming Practices.

G. Show Cause Order and Institution of Trial-Type EvidentiaryProceeding

70. As described above, and as the Staff Final Report concludes, the GamingPractices identified above violate the ISO's and PX's filed tariffs, and the IdentifiedEntities appear to have engaged in such practices, as identified above.

71. Accordingly, we require these entities to show cause, in a trial-type evidentiaryproceeding to be held before an ALJ, why they should not be found to have engaged inGaming Practices in violation of the ISO's and PX's tariffs.75 In addition, we direct theALJ to hear evidence and render findings and conclusions, quantifying the full extent to


Docket No. EL03-137-000, et al. - 34 -

76We will permit the parties to introduce relevant evidence from the 100 DaysEvidence proceeding. See supra P 9.

As discussed in the Staff Final Report and in the body of this order, there isevidence of gaming and/or anomalous market behavior sufficient to require the IdentifiedEntities to show cause why they should not be found to have engaged in GamingPractices in violation of the ISO's and PX's tariffs. As a result, the burden of goingforward will be placed on the Identified Entities. However, the ultimate burden is uponthe Commission. To that end, the Commission is aware that many parties in Californiaand elsewhere in the West have sought a forum in which to address the issues raised inthis proceeding. Those parties may participate in this proceeding upon attainingintervenor status.

77See supra P 2.

which the entities named herein may have been unjustly enriched by their engaging inGaming Practices.76 We require that any and all such unjust profits for the period January 1, 2000 to June 20, 2001 be disgorged in their entirety. We also direct the ALJto consider any additional, appropriate non-monetary remedies, as may be appropriate,e.g., revocation of an Identified Entity's market-based rate authority and revisions to anIdentified Entity's code of conduct.77

72. The ISO shall, within 21 days of the date of this order, provide the IdentifiedEntities all of the specific transaction data for each of the Gaming Practices discussed inthe ISO Report, including an explanation of the screen(s) that it used to identify thetransactions in question. The ISO shall contemporaneously file that transaction data,including the explanation of its screen(s), with the Commission. Unless the IdentifiedEntity files an offer of settlement as discussed below, within 45 days thereafter, theIdentified Entities shall file their show cause responses.

73. We recognize that, in some instances, the burdens and costs to both the parties andthe Commission associated with litigating whether certain market participants engaged inparticular Gaming Practices and violated the MMIP may exceed the revenues and unjustprofits that resulted from such transactions. There are also many disputed issues of factwhich, in litigation, would tend to prolong uncertainty for the Identified Entities and themarketplace as a whole. Therefore, we encourage the Identified Entities to resolve theseproceedings by settlement with the Commission's Trial Staff. In this regard, shouldparticipants not settle on a mechanism to distribute monies, the ALJ should requestcomment and render a finding on a mechanism that will fairly distribute any monies tothose customers harmed by the Gaming Practices.


Docket No. EL03-137-000, et al. - 35 -

74. Finally, given the commonality of issues of law and fact presented herein, DocketNos. EL03-137-000, EL03-138-000, EL03-139-000, EL03-140-000, EL03-141-000,EL03-142-000, EL03-143-000, EL03-144-000, EL03-145-000, EL03-146-000, EL03-147-000, EL03-148-000, EL03-149-000, EL03-150-000, EL03-151-000, EL03-152-000,EL03-153-000, EL03-154-000, EL03-155-000, EL03-156-000, EL03-157-000, EL03-158-000, EL03-159-000, EL03-160-000, EL03-161-000, EL03-162-000, EL03-163-000,EL03-164-000, EL03-165-000, EL03-166-000, EL03-167-000, EL03-168-000, EL03-169-000, EL03-170-000, EL03-171-000, EL03-172-000, EL03-173-000, EL03-174-000,EL03-175-000, EL03-176-000, EL03-177-000, EL03-178-000 and EL03-179-000 willbe consolidated for purposes of hearing and decision.

The Commission orders:

(A) Pursuant to the authority contained in and subject to the jurisdictionconferred upon the Federal Energy Regulatory Commission by section 402(a) of theDepartment of Energy Organization Act and the Federal Power Act, and pursuant to theCommission's Rules of Practice and Procedure and the regulations under the FederalPower Act (18 C.F.R. Chapter I), a public hearing shall be held in Docket Nos. EL03-137-000, EL03-138-000, EL03-139-000, EL03-140-000, EL03-141-000, EL03-142-000,EL03-143-000, EL03-144-000, EL03-145-000, EL03-146-000, EL03-147-000, EL03-148-000, EL03-149-000, EL03-150-000, EL03-151-000, EL03-152-000, EL03-153-000,EL03-154-000, EL03-155-000, EL03-156-000, EL03-157-000, EL03-158-000, EL03-159-000, EL03-160-000, EL03-161-000, EL03-162-000, EL03-163-000, EL03-164-000,EL03-165-000, EL03-166-000, EL03-167-000, EL03-168-000, EL03-169-000, EL03-170-000, EL03-171-000, EL03-172-000, EL03-173-000, EL03-174-000, EL03-175-000,EL03-176-000, EL03-177-000, EL03-178-000 and EL03-179-000: (1) where theIdentified Entities shall show cause why they should not be found to have employed theabove-described Gaming Practices in violation of the ISO's and PX's tariffs; and (2)where the appropriate remedies may be identified and quantified, as discussed in thebody of this order.

(B) Any interested person desiring to be heard in these proceedings should file anotice of intervention or motion to intervene with the Federal Energy RegulatoryCommission, 888 First Street, N.E., Washington, DC 20426, in accordance with Rule214 of the Commission's Rules of Practice and Procedure (18 C.F.R. § 385.214), within21 days of the date of this order.

(C) The ISO is hereby directed to provide the Identified Entities with all of thespecific transaction data for each of the Gaming Practices discussed in the ISO Report,


Docket No. EL03-137-000, et al. - 36 -

including an explanation of the screen that it used to identify the transactions in question,within 21 days of the date of this order, as discussed in the body of this order. The ISOshall contemporaneously file such transaction data with the Commission.

(D) Within 45 days of the ISO's submittal made pursuant to Ordering Paragraph(C) above, the Identified Entities shall submit show cause responses, as discussed in thebody of this order.

(E) An administrative law judge, to be designated by the Chief AdministrativeLaw Judge, shall convene a prehearing conference in this proceeding to be held withinapproximately fifteen (15) days of the filing of the show cause submissions ordered inOrdering Paragraph (D) above, in a hearing room of the Federal Energy RegulatoryCommission, 888 First Street, NE, Washington, D.C. 20426. Such conference shall beheld for the purpose of establishing a procedural schedule. The presiding judge isauthorized to establish procedural dates and to rule on all motions (except motions todismiss), as provided in the Commission's Rules of Practice and Procedure.

(F) Docket Nos. EL03-137-000, EL03-138-000, EL03-139-000, EL03-140-000,EL03-141-000, EL03-142-000, EL03-143-000, EL03-144-000, EL03-145-000, EL03-146-000, EL03-147-000, EL03-148-000, EL03-149-000, EL03-150-000, EL03-151-000,EL03-152-000, EL03-153-000, EL03-154-000, EL03-155-000, EL03-156-000, EL03-157-000, EL03-158-000, EL03-159-000, EL03-160-000, EL03-161-000, EL03-162-000,EL03-163-000, EL03-164-000, EL03-165-000, EL03-166-000, EL03-167-000, EL03-168-000, EL03-169-000, EL03-170-000, EL03-171-000, EL03-172-000, EL03-173-000,EL03-174-000, EL03-175-000, EL03-176-000, EL03-177-000, EL03-178-000 andEL03-179-000 are hereby consolidated for purposes of hearing and decision.

(G) The Secretary is hereby directed to publish a copy of this order in the FederalRegister.

By the Commission. Commissioner Massey dissented in part with a separate statement attached.( S E A L )

Magalie R. Salas, Secretary.


UNITED STATES OF AMERICAFEDERAL ENERGY REGULATORY COMMISSION

American Electric Power Service Corporation Docket No. EL03-137-000Aquila, Inc. Docket No. EL03-138-000Arizona Public Service Company Docket No. EL03-139-000Automated Power Exchange, Inc. Docket No. EL03-140-000Bonneville Power Administration Docket No. EL03-141-000California Department of Water Resources Docket No. EL03-142-000California Power Exchange Docket No. EL03-143-000Cargill-Alliant, LLC Docket No. EL03-144-000City of Anaheim, California Docket No. EL03-145-000City of Azusa, California Docket No. EL03-146-000City of Glendale, California Docket No. EL03-147-000City of Pasadena, California Docket No. EL03-148-000City of Redding, California Docket No. EL03-149-000City of Riverside, California Docket No. EL03-150-000Coral Power, LLC Docket No. EL03-151-000Duke Energy Trading and Marketing Company Docket No. EL03-152-000Dynegy Power Marketing Inc., Docket No. EL03-153-000 Dynegy Power Corp., El Segundo Power LLC, Long Beach Generation LLC, Cabrillo Power I LLC, and Cabrillo Power II LLCEnron Power Marketing, Inc. Docket No. EL03-154-000 and Enron Energy Services Inc.Florida Power & Light Docket No. EL03-155-000Idaho Power Company Docket No. EL03-156-000Los Angeles Department of Water and Power Docket No. EL03-157-000Mirant Americas Energy Marketing, LP, Docket No. EL03-158-000 Mirant California, LLC, Mirant Delta, LLC, and Mirant Potrero, LLCModesto Irrigation District Docket No. EL03-159-000Morgan Stanley Capital Group Docket No. EL03-160-000Northern California Power Agency Docket No. EL03-161-000Pacific Gas and Electric Company Docket No. EL03-162-000PacifiCorp Docket No. EL03-163-000PGE Energy Services Docket No. EL03-164000Portland General Electric Company Docket No. EL03-165-000Powerex Corporation Docket No. EL03-166-000 (f/k/a British Columbia Power Exchange Corp.)Public Service Company of Colorado Docket No. EL03-167-000


Public Service Company of New Mexico Docket No. EL03-168-000

2Puget Sound Energy, Inc. Docket No. EL03-169-000Reliant Resources, Inc., Docket No. EL03-170-000 Reliant Energy Power Generation, and Reliant Energy Services, Inc.Salt River Project Agricultural Docket No. EL03-171-000 Improvement and Power DistrictSan Diego Gas & Electric Company Docket No. EL03-172-000Sempra Energy Trading Corporation Docket No. EL03-173-000Sierra Pacific Power Company Docket No. EL03-174-000Southern California Edison Company Docket No. EL03-175-000TransAlta Energy Marketing (U.S.) Inc. Docket No. EL03-176-000 and TransAlta Energy Marketing (California), Inc.Tucson Electric Power Company Docket No. EL03-177-000Western Area Power Administration Docket No. EL03-178-000Williams Energy Services Corporation Docket No. EL03-179-000

(Issued June 25, 2003)

MASSEY, Commissioner, dissenting in part:

Today the Commission takes another step toward addressing the marketmanipulation that contributed to the extraordinary Western power crisis. I support thisshow cause order, and applaud the Commission for dealing with these issues. I writeseparately to express my disagreement with two aspects of the order.

First, I would not limit the monetary penalty for tariff violations to disgorgement ofunjust profits. Market manipulation can raise the single market clearing price paid by allmarket participants and collected by all sellers. The Federal Power Act requires that allrates and charges be just and reasonable. Where the market has been manipulated so as toaffect the market clearing price, that price is not just and reasonable and is thereforeunlawful. Simply requiring that bad actors disgorge their individual profits does not makethe market whole because all sellers received the unlawful price caused by themanipulation. The narrow remedy of profit disgorgement is not an adequate remedy forthe adverse effect of the bad behavior on the market price, and may not be an adequatedeterrent to future behavior. The appropriate remedy may be that the manipulating seller


78The Commission has accepted the make the market whole remedy as part of a settlement for withholding generation from the California PX market. See 102 FERC¶ 61,108 (2003).

79San Diego Gas & Electric Company et al., 96 FERC ¶ 61,120 (2001).

3makes the market whole.78 Unfortunately, today's order appears to take this remedy off ofthe table. I would prefer to wait to see the extent of harm that specific behaviors causedbefore addressing the remedy issue.

Second, I would not apply the show cause order to non-public utilities that areotherwise not jurisdictional. Today's order uses the same rationale for doing so as wasused to extend a refund obligation to non-public utilities in our July 25, 2001 Order.79 Idisagreed with the rationale at that time, and I still do not believe the Commission has thisauthority.

For these reasons, I dissent in part from today's order.

William L. MasseyCommissioner


Docket No. EL03-137-000, et al. - 1 -

Attachment A

Market Participants Alleged to Have Engaged in the FalseImport Practice in Violation of the MMIP

1. Aquila, Inc.

2. Arizona Public Service Co.

3. Bonneville Power Administration

4. City of Glendale

5. Coral Power, LLC

6. Duke Energy Trading and Marketing Co.

7. Dynegy Power Marketing Inc., Dynegy Power Corp., El Segundo Power LLC,Long Beach Generation LLC, Cabrillo Power I LLC, and Cabrillo Power II LLC

8. Enron Power Marketing, Inc. and Enron Energy Services Inc.

9. Idaho Power Co.

10. Los Angeles Department of Water and Power

11. Mirant Americas Energy Marketing, LP, Mirant California, LLC, Mirant Delta,LLC, and Mirant Potrero, LLC

12. Pacificorp

13. PGE Energy Services

14. Portland General Electric Co.

15. Powerex Corp.

16. Public Service Co. of New Mexico

17. Puget Sound Energy

18. Reliant Resources, Inc., Reliant Energy Power Generation, and Reliant EnergyServices, Inc.

19. Salt River Project Agricultural Improvement and Power District


Docket No. EL03-137-000, et al. - 2 -

20. Sempra Energy Trading Corp.

21. Tuscon Electric Power Co.

22. Williams Energy Services Corp.


Docket No. EL03-137-000, et al. - 3 -

Attachment B

Market Participants Alleged to Have Engaged inCongestion-Related Practices in Violation of the MMIP

Cutting Non-firm

1. American Electric Power Services Corp.

2. Aquila, Inc

3. Cargill-Alliant, LLC

4. City of Glendale

5. City of Riverside

6. Coral Power, LLC

7. Duke Energy Trading & Marketing Company




11. Morgan Stanley Capital Group

12. Pacific Gas and Electric Company

13. PacifiCorp.

14. Portland General Electric Company

15. Powerex Corp.

16. Puget Sound Energy, Inc.

17. San Diego Gas & Electric Company

18. Sempra Energy Trading

19. Sierra Pacific Power Company

20. Southern California Edison Company


Docket No. EL03-137-000, et al. - 4 -

Circular Scheduling

21. American Electric Power Service Corp.

22. Aquila, Inc.

23. Automated Power Exchange, Inc.

24. Cargill-Alliant, LLC

25. City of Glendale

26. City of Redding

27. City of Riverside

28. Coral Power, LLC

29. Duke Energy Trading and Marketing Company



32. F P & L Energy

33. Idaho Power Company



36. Modesto Irrigation District


38. Pacificorp

39. PGE Energy Services

40. Powerex Corp.

41. Public Service Company of Colorado


43. San Diego Gas & Electric Company



Docket No. EL03-137-000, et al. - 5 -

45. Southern California Edison Company

46. TransAlta Energy Marketing (U.S.) Inc. and TransAlta Energy Marketing(California), Inc.


Scheduling Service on Out-of-Service Lines

48. City of Anaheim






54. Powerex Corp.


Load Shift

56. City of Glendale








Docket No. EL03-137-000, et al. - 6 -

63. Northern California Power Agency

64. Powerex Corp.



Docket No. EL03-137-000, et al. - 7 -

Attachment C

Market Participants Alleged to Have Engaged in PaperTrading in Violation of the MMIP

1. Arizona Public Service Co.



4. California Department of Water Resources

5. California Power Exchange

6. City of Anaheim

7. City of Azusa

8. City of Glendale

9. City of Pasadena


11. Duke Energy Trading & Marketing Co.



14. Idaho Power Company





19. Pacific Gas and Electric Co.

20. Powerex Corp.



Docket No. EL03-137-000, et al. - 8 -



24. Southern California Edison Co.

25. Western Area Power Administration



Docket No. EL03-137-000, et al. - 9 -

Attachment D

Market Parties Alleged to Have Engaged in Double Sellingin Violation of the MMIP

1. Duke Energy Trading and Marketing Co.





Docket No. EL03-137-000, et al. - 10 -

80The following entities filed comments in a related proceeding in Puget SoundEnergy, Inc., et al. v. All Jurisdictional Sellers, Docket No. EL01-10-000: AES, Avistaet al., CARE, Public Utility District No. 1 of Chelan County, City of Santa Clara, City ofSeattle, City of Tacoma and Port of Seattle, Coral Power, Duke Energy North America,IDACORP and Idaho Power, Kaiser Aluminum & Chemical, Modesto Irrigation District,Northern California Power Agency, Northwest PUDs (Public Utility District No. 2 ofGrant County, WA et al.), PacifiCorp, Pinnacle West, Portland General Electric, PPLMontana and PPL Energy Plus, Public Service Company of New Mexico, Puget SoundEnergy, Reliant Energy, Sacramento Municipal Utility District, Transaction FinalityGroup, TransAlta Energy Marketing, Williams Energy Marketing & Trading Company.

Attachment E

Entities that Submitted 100 Day Evidence in California (Docket Nos. EL00-95, EL00-98, EL01-10, EL02-60 andEL02-62)80

1. AES Alamitos, LLC, AES Huntington Beach, LLC, AES Redondo Beach, LLC,and AES Southland, LLC (AES)

2. Allegheny Energy Supply Co.

3. Arizona Electric Power Cooperative, Inc.


5. Avista Energy, Inc.

6. Avista Corporation d/b/a Avista Utilities

7. Avista Energy, Inc., BP Energy Company, IDACORP Energy L.P., Puget SoundEnergy, Inc., TransAlta Energy Marketing (U.S.) Inc., TransAlta Energy Marketing(California) Inc., and TransCanada Energy, Ltd.


9. BIT (City of Burbank, California, the Imperial Irrigation District, TurlockIrrigation District) (Joint Reply Comments and Proposed Reply Findings)

10. California Electricity Oversight Board and California Public Utilities Commission

11. City of Burbank, California, City of Glendale, California, Turlock IrrigationDistrict, and Imperial Irrigation District

12. California Independent System Operator Corporation


Docket No. EL03-137-000, et al. - 11 -

13. California Parties (People of the State of California ex rel. Bill Lockyer, AttorneyGeneral, the California Electricity Oversight Board, the California Public UtilitiesCommission, Pacific Gas and Electric Company, and Southern California EdisonCompany)

14. CAlifornians for Renewable Energy (CARE)

15. Calpine Corporation

16. Cities of Anaheim, Azusa, Banning, Colton and Riverside, California

17. City of Glendale, California

18. City of Pasadena, California

19. City of Redding, California

20. City of Santa Clara

21. City of Seattle, Washington

22. City of Vernon, California

23. Competitive Supplier Group (El Paso Merchant Energy, LP, BP Energy Company,Coral Power, IDACORP Energy LP, Exelon Corporation on behalf of ExelonGeneration Company, LLC, PECO Energy Company and Commonwealth EdisonCompany, Portland General Electric Company, Public Service Company of NewMexico, Sempra Energy Trading Corporation, TransAlta Energy Marketing (U.S.)Inc., TransAlta Energy Marketing (California), Inc., TransCanada Energy Ltd.,Avista Energy, Inc., Puget Sound Energy, Inc., Constellation Power Source, Inc.,Powerex Corp., and Public Service Company of Colorado)

24. Constellation Power Source, Inc. and NewEnergy, Inc.


26. Duke Energy North America, LLC and Duke Energy Trading and Marketing, LLC(Duke Energy)

27. Dynegy Power Marketing, Inc. et al.

28. Electric Power Supply Association

29. El Paso Merchant Energy, LP

30. Enron Power Marketing, Inc. and Enron Energy Services, Inc.

31. Eugene Water & Electric Board


Docket No. EL03-137-000, et al. - 12 -

32. Exelon (Exelon Corporation on behalf of Commonwealth Edison Company,Exelon Generation Company, LLC and PECO Energy Company)

33. Public Utility District No. 2 of Grant County

34. Hafslund Energy Trading, LLC

35. IDACORP Energy LP and Idaho Power Company

36. Imperial Irrigation District

37. Independent Energy Producers Association

38. Indicated Long-Term Sellers (Allegheny Energy Supply Company, LLC, CoralPower, L.L.C., Mirant Americas Energy Marketing, L.P., Morgan Stanley CapitalGroup Inc. and Sempra Energy Resources)


40. Merrill Lynch Capital Services, Inc.

41. Mirant (Mirant Americas Energy Marketing, LP, Mirant California, LLC, MirantDelta, LLC, and Mirant Potrero, LLC)

42. Mirant Americas Energy Marketing, LP

43. Morgan Stanley Capital Group, Inc.


45. PacifiCorp

46. PGET and PGEES

47. Pinnacle West Companies

48. Portland General Electric Company

49. Powerex Corp.

50. PPL Montana, LLC and PPL EnergyPlus, LLC (PPL Parties)

51. PPM Energy Inc. (fna Pacificorp Power Marketing Inc.)

52. Public Service Company of Colorado

53. Public Service Company of New Mexico


55. Reliant Energy Power Generation, Inc. and Reliant Energy, Inc. (Reliant)


Docket No. EL03-137-000, et al. - 13 -

56. Sacramento Municipal Utility District

57. Enron


59. Sempra Energy Resources


61. Public Utility District No. 1 of Snohomish County, Washington

62. TransAlta Energy Marketing (U.S.) Inc. and TransAlta Energy Marketing(California), Inc.

63. TransCanada Energy, Ltd.

64. Turlock Irrigation District

65. Tuscon Electric Power Company

66. Valley Electric Association, Inc.

67. Western Area Power Administration

68. Western Power Trading Forum

69. Williams Energy Marketing & Trading Company


Docket No. EL03-137-000, et al. - 14 -

Attachment F

Parties Filing Briefs on Commission Staff's Interpretationof the MMIP

1. American Public Power Association

2. Arizona Electric Power Cooperative

3. Avista Energy


5. California Generators (Mirant, Dynegy, Williams)

6. California Independent System Operator Corporation

7. California Parties (California Attorney General, California Electricity Oversight Board, California Public Utilities Commission, Pacific Gas & Electric Company, andSouthern California Edison Company)

8. Calpine Corporation

9. CARE

10. City of Glendale, California

11. City of Redding, California

12. City of San Diego, California

13. Colorado River Commission of Nevada

14. Competitive Supplier Group (Aquila, Aquila Merchant Services, Arizona Public Service Company, Avista Energy, Constellation Power Source, Coral Power, El PasoMerchant Energy, IDACORP Energy, Idaho Power Company, Pinnacle West CapitalCorporation, Portland General Electric, Puget Sound Energy, and Sempra EnergyTrading Corp.)

15. Coral Power


Docket No. EL03-137-000, et al. - 15 -

16. Duke Energy North America and Duke Energy Trading and Marketing

17. Electric Power Supply Association

18. Electricity Consumers Resource Council

19. Enron Power Marketing, Inc.

20. Grays Harbor County, Washington Public Utility District


22. MG Industries, Tamco, and Lehigh Southwest Cement Company




26. PJM Industrial Customer Coalition

27. PacifiCorp

28. Powerex Corp.

29. Public Service Company of New Mexico

30. Public Utility District No. 2 of Grant County, Washington

31. Puget Sound Energy

32. Reliant



Docket No. EL03-137-000, et al. - 16 -

Attachment G: ISO Market Notice

MARKET NOTICEJuly 3, 2002

Ancillary Services Payments Rescinded Due To Generator Unavailability

Market Participants and Scheduling Coordinators:As detailed in a Market Notice posted on July 2, 2002, the ISO has received requests fromvarious parties for information about Scheduling Coordinators (1) that initially receivedpayments for providing to the ISO Ancillary Services that subsequently were rescindedbecause the scheduled generating units were unable to provide such services, and (2) thatagreed to provide Ancillary Services for their own needs (i.e., self-provision) but in factdid not do so. As described in the July 2, 2002 Market Notice, the ISO does not considerthe names of such Scheduling Coordinators or the aggregated amounts of paymentsrescinded for non-performance or additional charges for failure to self-provide to beconfidential or commercially sensitive under the ISO Tariff Section 20.3.2. The ISO monitors the availability and performance of generating resources scheduled toprovide Ancillary Services. Beginning on June 14, 1999, the ISO began rescindingAncillary Services capacity payments when such services were not delivered. Failure todeliver such services may be the result of a number of factors, including economicdecisions, outages, or operational changes. The ISO charges the relevant market price toScheduling Coordinators that indicated they would self-provide Ancillary Services butsubsequently did not do so. The Ancillary Services payments listed below represent all invoiced amounts throughApril 30, 2002 and are subject to potential change as a result of the dispute resolutionprocess set forth in the ISO Tariff.

Scheduling Coordinator Name Ancillary Service Capacity Payments Rescinded

Arizona Public Service Co. $ 17,832.13

Automated Power Exchange $ 213,288.24

Avista Energy $ 53,466.57

Bonneville Power Administration $ 33,432.76

California Department of Water Resources $ 2,167,285.09

California Power Exchange $ 20,275,167.45

Calpine $ 2.65


Docket No. EL03-137-000, et al. - 17 -

81The "PG&E Transmission - Non-Grid" charges are in dispute and have not yetbeen invoiced to PG&E Transmission. PG&E Transmission's responsibility for paymentof these charges currently is under consideration by the Federal Energy RegulatoryCommission.

City of Anaheim $ 93,042.14

City of Azusa $ 4,450.00

City of Glendale $ 1,971.41

City of Pasadena $ 609,196.38

City of Vernon $ 6,106.33

Constellation Power Source $ 1,456.53

Coral Power $ 56,459.65

Duke Energy Trading & Marketing $ 14,355,586.95

Dynegy Electric Clearinghouse $ 25,193,737.23

Enron Power Marketing Inc $ 991,443.30

Mirant $ 11,167,048.87

Modesto Irrigation District $ 51,176.11

Northern California Power Agency $ 146,592.71

PG&E - Utility $ 10,995,192.78

PG&E Transmission $ 19,411.23

PG&E Transmission - Non-Grid81 $ 65,199.05

Portland General Electric Co $ 3,347.35

PowerEx $ 389,325.10

Puget Sound Energy $ 10,000.00

Reliant Energy Services $ 16,715,969.28

Sempra Energy Trading $ 22,215.60

Southern California Edison $ 286,310.15

Western Area Power Administration $ 21,304.02

Williams Energy Services $ 25,073,505.04

Total $ 129,040,522.10


Docket No. EL03-137-000, et al. - 18 -

If you have any questions, about this Market Notice, please contact your Client AccountRepresentative.

Client Relations [email protected]


20030625-3071 issued by ferc osec 06/25/2003 in docket ... · williams energy services corporation...

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